CII CF1 2025-26 > Chapter 2 > Flashcards

Chapter 2 Flashcards

Main Areas of Financial Advice: The Present (65 cards)

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1
Q
A
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2
Q

What are the basic monthly outgoings that everyone needs to cover?

A
  • Rent or mortgage
  • Utility bills
  • Large, one-off expenses

These expenses include holidays, household and car repairs, and gifts.

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3
Q

If clients finance irregular expenditure through short-term loans, what should they ensure?

A

Enough money to pay off these debts

This helps avoid high levels of interest.

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4
Q

What is the difference between someone’s income and expenditure called?

A

Disposable income

This figure may lead to exaggerated expectations about available funds.

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5
Q

Income can include all earnings from which sources?

A
  • Employment
  • Self-employment
  • State benefits
  • Investment
  • Savings
  • Pension income
  • Maintenance payments

Understanding income sources is essential for financial planning.

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6
Q

Expenditure can be considered under three headings. Name them.

A
  • Essential spending
  • Everyday spending
  • Occasional or non-essential spending

This classification helps in managing budgets effectively.

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7
Q

What is a debt management plan (DMP)?

A

A plan set up by a third-party provider to negotiate with creditors

DMPs help establish acceptable repayment plans.

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8
Q

What does debt consolidation involve?

A

Negotiating a new loan to repay existing loans

This often comes with lower interest rates but may include high fees.

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9
Q

What is the common use of the term ‘mortgage’?

A

A loan used to buy a property

Technically, the mortgage is the security offered in exchange for the loan.

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10
Q

What is a buy-to-let mortgage?

A

A loan taken out by an investor on a property to be rented

These mortgages are usually more expensive due to higher risk.

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11
Q

Name the two main ways of repaying a mortgage.

A
  • Capital and interest repayment
  • Interest-only

Each method has different implications for the borrower.

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12
Q

What are the types of mortgage mentioned?

A
  • Capped
  • Cap and collar
  • Discount
  • Euro
  • Equity-linked
  • Equity release
  • Fixed interest
  • Flexible reserve
  • Green
  • Offset
  • Tracker

Each type has unique features and benefits.

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13
Q

What are the two main types of loan?

A
  • Structured loans
  • Unstructured loans

Each type has different characteristics and risks.

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14
Q

What is a structured loan typically used for?

A

Smaller purchases, such as a car

These loans have a fixed rate of interest and repayment structure.

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15
Q

What is the risk associated with unstructured loans?

A

Higher risk due to lack of collateral

These loans often have higher costs.

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16
Q

What is the main principle of loans?

A

To make use of other people’s money to fund a particular venture

This is often due to insufficient personal funds or better use of capital elsewhere.

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17
Q

What does gearing up mean in the context of investment?

A

Investment bought using finance (borrowings)

It allows for increased investment returns through the use of borrowed money.

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18
Q

For gearing up to work for an investor, what must the interest on the loan be compared to?

A

Less than the increase in the value of the property

If not, the investor loses money more quickly due to gearing.

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19
Q

What is a common dilemma for someone who comes into a large sum of money while having an outstanding mortgage?

A

Whether to invest the money or repay the loan

This decision often depends on evaluating the cost of servicing the mortgage against potential investment returns.

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20
Q

What are the factors influencing protection needs?

A
  • Age
  • Dependants
  • Income
  • Financial liabilities
  • Employment status
  • Existing cover

These factors help determine the level of protection required.

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21
Q

What is a common method to estimate the level of death cover needed?

A

A factor of ten times earnings less any State benefits

This helps determine how much cover is required to replace lost income.

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22
Q

What must be deducted from income to assess how much ‘spare’ money is available for protection?

A

Regular payments such as mortgage and loan repayments

This helps establish the affordability of protection premiums.

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23
Q

What type of insurance might self-employed/sole traders consider for income protection?

A

Life insurance, medical insurance, and income protection

They are responsible for protecting their own income.

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24
Q

What should be considered when assessing the overall need for protection?

A

Existing cover

This includes existing insurance policies, benefits from pensions, and State benefits.

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25
What is the impact of **financial liabilities** on protection needs?
They must be taken into account when assessing protection needs ## Footnote Liabilities include mortgages, loans, and taxes.
26
What happens to the **inheritance tax (IHT)** in the case of a deceased's estate?
It must be paid by the legal personal representatives before assets can be passed to beneficiaries ## Footnote This can be managed through life insurance policies written in trust.
27
What is the **life cycle model** used to illustrate?
The interaction of factors impacting the level of protection needed ## Footnote It highlights how different life stages require varying financial protection.
28
What are the **stages** of the life cycle model?
* Childhood * Young single * Young partnered * Starting a family * Family with older children * Post-family, pre-retirement * Retirement ## Footnote Each stage has distinct financial needs and protection requirements.
29
During **childhood**, who meets the child's financial and protection needs?
Parents or guardians ## Footnote This period lasts until children finish their full-time education.
30
What are the main protection needs for a **young single** individual?
* Build up an emergency fund * Protect earnings against illness ## Footnote They generally have no dependants and little need for life assurance.
31
In the **young partnered** stage, what financial responsibilities do couples share?
* Domestic costs * Long-term goals ## Footnote Their incomes are typically low, and they need to protect against loss of income.
32
What high protection needs arise when **starting a family**?
* Protect family's standard of living if a parent dies * Protect against long-term illness of either parent ## Footnote Families may depend on one income and face high expenses.
33
As parents grow older and their children become independent, what financial changes occur?
* Increased capacity to earn * More disposable income ## Footnote This allows for contributions to retirement and other financial objectives.
34
What financial priorities emerge in the **post-family, pre-retirement** stage?
* Sufficient savings for retirement * Protection against ill-health and death ## Footnote The need to protect children against financial consequences disappears.
35
What is the **annual retirement income** needed to maintain the same standard of living?
Two thirds of the final year's income ## Footnote Many individuals have significantly less saved, often 20% or less.
36
What significant events can disrupt the **life cycle model**?
* Early death * Relationship breakdown * Late death ## Footnote These events can alter financial needs and responsibilities.
37
What is **term insurance**?
A policy that pays a lump sum on death, with no savings element ## Footnote It does not pay out in the event of illness.
38
What are the types of **term insurance** policies available?
* Level term insurance * Decreasing term insurance * Family income benefit (FIB) * Increasing term insurance * Convertible term insurance * Renewable term insurance ## Footnote Each type serves different financial needs.
39
What does **endowment insurance** provide?
A lump sum on death or at maturity if the policyholder survives ## Footnote It includes an investment element.
40
What is a **whole of life policy**?
Provides guaranteed life cover for the policyholder's lifetime ## Footnote It also includes an investment element.
41
What is the difference between **non-profit** and **with-profits whole of life policies**?
* Non-profit: Fixed amount of life cover * With-profits: Minimum cover with annual bonuses ## Footnote With-profits policies may also accumulate a higher surrender value.
42
What is **income protection (IP)** insurance designed for?
To provide tax-free income for individuals unable to work due to illness or accident ## Footnote Benefits are paid after a specified deferred period.
43
What factors influence the choice of **deferred period** in income protection policies?
* Individual circumstances * Employment status * Willingness to use savings ## Footnote A shorter deferred period results in higher premiums.
44
What is the maximum level of benefit payable under an **income protection policy**?
50-60% of earnings ## Footnote Restrictions are imposed to ensure claimants have an incentive to return to work.
45
What is the term used for **permanent health insurance policy**?
Income protection policy ## Footnote The term 'permanent' indicates that the insurer cannot cancel the policy as long as premiums are paid.
46
Income protection policies are based on **morbidity** rather than what?
Mortality ## Footnote Mortality refers to the length of time someone is likely to live.
47
What is the **deferred period** for personal accident and sickness policies?
One to fourteen days ## Footnote This is shorter compared to at least four weeks for income protection policies.
48
True or false: An **income protection policy** can be cancelled by the insurer.
FALSE ## Footnote An income protection policy cannot be cancelled by the insurer as long as premiums are paid.
49
What type of benefit does a personal accident and sickness policy provide in addition to regular benefits?
One-off lump sum ## Footnote This is paid if the insured loses a limb, digit, sight, or is permanently disabled.
50
What is the typical maximum benefit duration for personal accident and sickness policies?
One or two years ## Footnote This is shorter than the retirement age or earlier death under income protection policies.
51
What is a key difference in the **application procedure** between sickness and accident policies and income protection policies?
Simpler application procedure ## Footnote Sickness and accident policies usually have a reduced number of health and occupation questions.
52
What is a potential risk for the insured if a sickness and accident policy is cancelled?
Difficulty obtaining replacement cover ## Footnote This can happen if the insurer feels that the number or length of claims has been unacceptably high.
53
The cost of **sickness and accident policies** is usually compared to income protection policies as:
Much lower ## Footnote The competitive pricing makes them an attractive option.
54
What does **Critical illness cover (CIC)** provide upon diagnosis?
A tax-free lump sum ## Footnote CIC pays this lump sum for a specified list of illnesses or permanent total disability before age 65.
55
List the **three ways** CIC differs from income protection.
* Tax-free lump sum paid instead of regular income * Payment made on diagnosis of specified illnesses only * Cover can be a stand-alone policy or part of life insurance ## Footnote Income protection pays benefits only if the policyholder is unable to work.
56
What are the **minimum critical illnesses** covered by every life insurance office?
* Heart attack * Stroke * Cancer * Surgery for coronary artery disease * Major organ transplant * Kidney failure/transplant ## Footnote Other conditions may include multiple sclerosis, paralysis, and blindness.
57
According to the **Guide to Minimum Standards of Critical Illness Cover**, what must new CIC policies cover?
* Cancer * Heart attack * Stroke ## Footnote This guideline was published by the ABI in September 2022.
58
Fill in the blank: A lump sum from CIC could be used to pay for _______.
private health care or treatment ## Footnote Other uses include home alterations, medical equipment, mortgage repayment, or providing an income through investment.
59
True or false: **Critical illness cover** and income protection policies are mutually exclusive.
FALSE ## Footnote Both policies are complementary and provide important financial protection.
60
What are the two types of **premiums** for CIC policies?
* Guaranteed premiums * Reviewable premiums ## Footnote Reviewable premiums may start cheaper but can increase over time based on medical advances.
61
What does **Payment protection insurance (PPI)** cover?
Repayments if someone is made redundant or cannot work due to illness or accident ## Footnote PPI is also known as ASU policies (accident, sickness, and unemployment).
62
What is the typical **maximum payment period** for PPI?
One or two years ## Footnote The benefit usually matches the monthly loan repayment until the insured returns to work.
63
What are the minimum standards for **Mortgage payment protection insurance (MPPI)**?
* Accident, sickness, and unemployment cover * Pay out after a maximum of 60 days off work * Benefits payable for no less than twelve months * Pay out to self-employed who have registered for ESA ## Footnote These standards are set by UK Finance and the ABI.
64
What is required for **contract workers** to claim benefits under MPPI?
Worked for the same employer for at least two years or renewed an annually renewable contract at least once ## Footnote This ensures eligibility for benefits.
65
How much notice must a provider give to **cancel or withdraw** MPPI policies?
A minimum of 90 days' notice ## Footnote Policies can also be amended with at least 30 days' notice.
CII CF1 2025-26
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